Template-Type: ReDIF-Paper 1.0

Author-Name: Ivan Fernandez-Val
Author-X-Name-First: Ivan
Author-X-Name-Last: Fernandez-Val
Author-Email: ivanf@bu.edu
Author-Workplace-Name: Department of Economics, Boston University


Title: Bias Correction in Panel Data Models with Individual Specific Parameters


Abstract: In random coefficients linear IV models, fixed effects averages of the random coefficients are
biased in short panels due to the finite-sample bias of IV estimators. This paper introduces a
new class of bias-corrected fixed effects estimators for panel data models where the response to
the regressors can be individual-specific in an unrestricted fashion. These estimators are based
on moment conditions that can be nonlinear functions in parameters and variables, encompassing
both linear and nonlinear random coe±cients models and allowing for the presence of endogenous
regressors. The corrections are derived from large-T expansions of the finite-sample bias, and
reduce the order of this bias from O(TĄ1) to O(TĄ2) for model parameters and other quantities
of interest, such as averages of the individual-specific coefficients. The asymptotic distribution
of the bias-corrected estimators are centered at the true parameter values under asymptotic
sequences where n = o(T3). In a Monte Carlo example for a linear IV model with both common
and individual-specific coefficients, I find that estimators that do not account for parameter
heterogeneity can be severely biased, and that bias corrections are effective in reducing the
bias of fixed effects estimates. These methods are illustrated through an analysis of earnings
equations for young men allowing the effect of the union status to be different for each individual.
The results suggest the presence of important heterogeneity in the union premium.


Length: 98 pages
Creation-Date: 2005-10
Revision-Date: 
Publication-Status:
File-URL: http://www.bu.edu/econ/workingpapers/papers/Ivan%20Fernandez-Val/panelgmm_oct25_2005.pdf
File-Format: Application/pdf
File-Function: 
Number: WP2005-041
Classification-JEL: C23; J31; J51.
Keywords: Random Coefficients; Panel Data; GMM; Fixed Effects; Bias; Union Premium.

Handle: RePEc:bos:wpaper:WP2005-041